Download “Classical” economic theory and “Keynesian

Aggregate Expenditures Model
• (Keynesian Economic Model -or- Keynesian Cross)
• Explain how the economy’s equilibrium RGDP relates
to total spending and how changes in total spending
affect levels of RGDP
• Clarify the basic determinants of the levels of output
and employment.
• Assumes a constant price level (is a “SHORT RUN”
model / view of the economy)
Full Output
Potential GDP
Aggregate Expenditures
AE
*Assumes
constant Price
level*
Real GDP
Real National Income
I. History
A. Classical Economists
• Market systems would ensure full
employment of the economy’s resources
• Acknowledge deviations from full
employment
• but insist there are “automatic
adjustments” {prices, wages, interest
rates} to restore the economy
• “self - correcting”
• Ex- if you experience a decrease in output and
employment…..
• Lead to lower prices, wages and interest
rates…..
• Lower prices = increase C
• Lower interest rates = increase Investment
• Lower wages = increase employment
Say’s Law
• If You Build It; They Will Come
Ensure full employment
Self correcting
The very act of producing goods generates an
amount of income = to the value of the goods
produced. “Supply Creates Its Own
Demand”
There will always be sufficient consumption
Works as a “LONG RUN” view
Specifically, what aspects of Say’s Law did Keynes
criticize and for each point he criticized, what was
his offered solution?
•
•
•
•
A.
Not all income will be spent
Unsold goods = accumulated inventory
Producers reduce output and cut
employment….= recession or depression
• B.
• Capitalism is not self regulating
• Failure of certain fundamental economic
decisions (saving and investment) to be
synchronized
• In Short Run – prices and wages are inflexible
• Extended periods of overproduction and
underconsumption …… = ?
• Recession or depression will prevail before
prices or wages significantly change.
Keynes’ Solution
***need govt. deficit spending
……………GREAT DEPRESSION and
NEW DEAL created believers of
KEYNESIAN ECONOMICS
………….Led to…………….
1946 Full Employment Act – responsibility of the
govt. to promote maximum employment, …..
production, and purchasing power, and price
stability (control inflation)
….now much of it shared with Fed Reserve
• Keynesian vs. Austrian (Hayek)
• Keynes vs. Hayek: The Great Debate
Continues
• Newly discovered letters from two great
economists shed light on today's discussion
of economic 'stimulus.'
1. “Classical” economic theory and
“Keynesian” economic theory are:
a) Similar
b) Exactly Same
c) Opposite
2.“Classical” theory and Hayek’s
(or Austrian) theory are:
a) Same
b) Different
3.Which of the following correctly identifies
similar economic ideas and people?
a)
b)
c)
d)
e)
Keynes, Hayek, Say
Say, Classical, Austrian
Classical, Austrian, Keynes
Hayek, Say’s Law, Okun’s Law
Keynesian, Say’s Law, Okun
4. The economy, left to natural market
forces, will find its way to a full employment
equilibrium. Who would agree with this?
a)
b)
c)
d)
e)
f)
g)
Keynes
Hayek
Austrian economists
Say
Classical economists
All of the above
All except Keynes
5. At the outset of the Great Depression, the
generally accepted economic solution from
the view of the government was to…..
a)
b)
c)
d)
e)
f)
Turn to Communist Manifesto
Move to Canada
Lower corporate tax rates
Enact trickle down policies
Engage in expansionary fiscal policy
Do nothing
6. Keynes’ proposed solution to FDR
included
a)
b)
c)
d)
e)
f)
Balancing the budget
Tax increases
Interest rate increases
Austerity measures
Deficit spending
Debt refinancing